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DDSI 10Q out... revenues increase by 40.9 %
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[QUOTE]Originally posted by Magfam: [QB] 10KSB/A: DIGITAL DESCRIPTOR SYSTEMS INC By Edgar Online - (EDG = 10Q, 10K) Last Update: 9/12/2006 2:37:05 PM Data provided by (EDGAR Online via COMTEX) -- ITEM 6. Management's Discussion and Analysis or Plan of Operations Except for historical matters contained herein, the matters discussed in this Form 10-KSB are forward-looking and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that these forward-looking statements reflect numerous assumptions, especially as regarding installation schedules and product mix, and involves risks and uncertainties which may affect Digital Descriptor Systems, Inc.'s business and prospects and cause actual results to differ materially from these forward-looking statements, including sufficient funds to finance working capital and other financing requirements of Digital Descriptor Systems, Inc., market acceptance of DDSI's products and competition in the computer industry. Critical Accounting Policies DDSI's critical accounting policies, including the assumptions and judgments underlying them, are disclosed in the Notes to the Financial Statements. These policies have been consistently applied in all material respects and address such matters as revenue recognition and depreciation methods. The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. DDSI derives revenue from the sale of hardware, software, post customer support (PCS), and other related services. PCS includes telephone support, bug fixes, and rights to upgrades on a when-and-if-available basis. Other related services include basic consulting and training. Included with the hardware is software that is not considered to be incidental. Revenue from transactions with customers where the software component is not considered to be incidental is allocated between the hardware and software components based on the relative fair value of the respective components. DDSI also derives revenue from the sale of software without a related hardware component. Revenue allocable to software components is further allocated to the individual deliverable elements of the software portion of the arrangement such as PCS and other services. In arrangements that include rights to PCS for the software and/or other services, the software component arrangement fee is allocated among each deliverable based on the relative fair value of each of the deliverables determined using vendor-specific objective evidence, which has been established by the separate sales of these deliverables. Plan of Operations The short-term objective of DDSI is the following: o The short-term objective of DDSI is to increase the market penetration of the product line of its CGM subsidiary as the Company believes this is the area where the greatest revenue growth exists. o Additionally, DDSI plans to execute an acquisition strategy based upon fund availability. DDSI's long-term objective is as follows: o To seek additional products to sell into its basic business market - Criminal Justice - so that DDSI can generate sales adequate enough to allow for profits. New products include biometric devices such as FMS (Fingerprint Matching System) and our integrated digital image and fingerprint package, Identify on Demand. DDSI believes that it will not reach profitability until the year 2006. Over the next twelve months, management is of the opinion that sufficient working capital will be obtained from operations and external financing to meet DDSI's liabilities and commitments as they become payable. DDSI has in the past successfully relied on private placements of common stock securities, bank debt, loans from private investors and the exercise of common stock warrants in order to sustain operations. If DDSI is unable to obtain additional funding in the future, it may be forced to curtail or terminate operations. A recent financing has been obtained and the underlying shares are being registered in this registration statement (see "Selling Shareholders" and "Recent Financing" on page 40). DDSI is doing the following in its effort to reach profitability: o Cut costs in areas that add the least value to DDSI o Concentrate on increasing the sales of the CGM product line. o Derive funds through investigating business alliances with other companies. o Increase revenues through the introduction of Compu-Capture(R), specifically towards kindergarten through twelfth grades, for the creation of ID cards. o Increase revenues through the introduction of a scaled down version of our Compu-Capture(R) product. o Acquire and effectively add management support to profitable companies complementary to its broadened target markets. Results of Operations Year Ended December 31, 2005 Compared to Year Ended December 31, 2004 Revenues for the year ended December 31, 2005 of $3,335,631 increased $2,923,579 or 710% from the year ended December 30, 2004. DDSI generates its revenues through software licenses, hardware, post customer support arrangements and other services. The increase in DDSI's revenue is attributed to the purchase of CGM Applied Security Technology, Inc in March 2005. During 2005, Maintenance revenues increased $3,410 or 1% from the year ended December 31, 2004 Cost of revenue for the year ended December 31, 2005 was $1,108,904 an increase of $1,064,122or 2376% from the prior year. The increase was attributable to the purchase of CGM Applied Security Technology, Inc in March 2005. Cost of revenue sold as a percentage of revenue for the year ended December 31, 2005 was 33% of total revenues, versus 10% the year earlier. Operating expenses increased $1,952,478 or 395% during the year ended December 31, 2005 versus the year ended December 31, 2004. This increase was mainly attributable to the purchase of CGM Applied Security Technology, Inc in March 2005. General and Administrative expenses for the year ending December 31, 2005 were $2,208,216versus $407,642 for the prior year for an increase of $1,800,574 or 442%. This increase was mainly attributable to the purchase of CGM Applied Security Technology, Inc in March 2005. Sales and Marketing expenses increased $67,158 for the year ended December 31, 2005 from $65,014 or a 103% increase. This increase was mainly attributable to an increase in professional services of $60,000 designated to investor relations. Research and development for the year ended December 31, 2005 was $106,505 compared to $21,759 for the same period prior year for an increase of $84,746 or a 390% increase, which was due in part to the purchase of CGM Applied Security Technology, Inc in March 2005. Debt discount amortization expense was increased $1,285,828 from $428,566 to $1,714,394 because of an error in the calculation. This error was found and corrected through our internal controls. The net (loss) for DDSI increased 95% or $(1,926,689) for the year ended December 31, 2005 to $(3,949,021) from $(2,022,332) for the year ended December 31, 2004. This was primarily due to the increase in operating expenses. Net cash (used in) operating activities for the year ended December 31, 2005 and 2004 was ($623,204) and ($296,038), respectively. The increase in cash (used in) operating activities in the year ended December 31, 2005 of ($327,166) was primarily due to the increase in operating expenses due in part to the purchase of CGM Applied Security Technology, Inc. in March 2005. Net cash provided by (used in) financing activities was $(531,691) and $3,324,517 for the year ended December 31, 2005 and 2004, respectively, reflecting a (decrease) of $(3,856,208). This decrease was primarily due to decrease in proceeds from issuance of convertible debenture. Liquidity and Capital Resources DDSI's revenues have been insufficient to cover the cost of revenues and operating expenses. Therefore, DDSI has been dependent on private placements of its common stock and issuance of convertible notes in order to sustain operations. In addition, there can be no assurances that the proceeds from private or other capital will continue to be available, or that revenues will increase to meet DDSI's cash needs, or that a sufficient amount of DDSI's common stock or other securities can or will be sold or that any common stock purchase options/warrants will be exercised to fund the operating needs of DDSI. Over the next twelve months, management is of the opinion that sufficient working capital will be obtained from operations and external financing to meet DDSI's liabilities and commitments as they become payable. DDSI has in the past relied on private placements of common stock securities, and loans from private investors to sustain operations. However, if DDSI is unable to obtain additional funding in the future, it may be forced to curtail or terminate operations. At December 31, 2005, DDSI had assets of $6,212,339 compared to $3,566,848 on December 31, 2004 an increase of $2,645,491 and shareholder deficiency of $(10,346,477) on December 31, 2005 compared to shareholder deficiency of $(7,234,362) on December 31, 2004, an increase of ($3,112,115). This increase in shareholder deficiency for the year ended December 31, 2005 resulted from the net loss for the year ended December 31, 2005. As of December 31, 2005, DDSI had decrease in working capital of $(8,559,687), a change from negative working capital of $(6,100,203) at December 31, 2004. The decrease in working capital was primarily a result of to the purchase of CGM Applied Security Technology, Inc. in March 2005. Recent Developments On March 1, 2005, DDSI and its wholly-owned subsidiary, CGM Applied Security Technologies, Inc. ("CGM Sub"), acquired substantially all of the assets of CGM Security Solutions, Inc., a Florida corporation ("CGM"), for (i) $1,500,000 in cash and (ii) a 2.86% promissory note (the "Note") in the principal amount of $3,500,000, subject to adjustment (the "Acquisition"). The assets of CGM were acquired pursuant to an Asset Purchase Agreement among DDSI, CGM Sub and CGM dated as of February 25, 2005. The principal amount of the Note is subject to adjustment based upon the average of (i) the gross revenues of CGM Sub for the fiscal year ending December 31, 2007 and (ii) an independent valuation of CGM Sub based upon the consolidated audited financial statements of the Company and CGM Sub for the fiscal years ended December 31, 2006 and 2007. In addition, the Company has granted CGM a secondary security interest in substantially all of its assets and intellectual property. In connection with the Acquisition, the Company entered into a letter agreement with certain of its investors (the "Investors") which extended the maturity date of debt instruments issued on November 30, 2004 until March 1, 2008, and amended the conversion price of the debt that is held by the Investors to the lower of Sep 12, 2006 [/QB][/QUOTE]
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